Re-Financing to Consolidate Debt

Refinancing and consolidating your debt can lower the total amount you pay out each month. You can even arrange to have extra cash. A few householders choose to re-finance to consolidate their existing debts. With this type of alternative, the householder may consolidate higher interest debts such as credit card debts under a lower interest house loan. The rates of interest associated with house loans are traditionally lower than the rates associated with credit cards by a considerable amount. Deciding whether or not to re-finance as the aim of debt consolidation may be a rather tricky issue. There are a number of complex factors which enter into the equation including the amount of existing debt, the difference in rates of interest as well as the difference in loan terms and the current financial situation of the householder.

This article will attempt to make this issue less complex by providing a function definition for debt integration and providing answer to two key questions householders should ask themselves before re-financing. These questions include whether the householder will pay more in the long run by consolidating their debt and will the householders financial situation improve if they re-finance.

What is Debt Consolidation?

The term debt consolidation may be somewhat confusing as the term itself is somewhat deceptive. When a householder re-finances his house for the aim of debt consolidation, he’s not really consolidating the debt in the true sense of the word. By definition to consolidate means to unite or to combine into one system. However, this isn’t what actually happens when debts are consolidated. The existing debts are really repaid by the debt integration loan. Although the total amount of debt remains constant the individual debts are repaid by the new loan.

Before the debt integration the householder may have been refunding an every month debt to one or more credit card companies, an auto loaner, a student loan loaner or any number of other loaners but now the householder is refunding one debt to the mortgage loaner who provided the debt integration loan. This new loan will be subject to the applicable loan terms including rates of interest and refund period. Any terms associated with the individual loans are no more valid as each of these loans has been repaid in full.

Are You Paying More in the Long Run?

When considering debt integration it’s important to determine whether lower every month payments or an overall increase in savings is being sought. This is an important consideration as while debt integration may lead to lower every month payments when a lower interest mortgage is obtained to refund higher interest debts there’s not always an overall price savings. This is because rate of interest alone doesn’t determine the amount which will be paid in interest. The amount of debt and the loan term, or length of the loan, figure prominently into the equation as well.

As an example consider a debt with a comparatively short loan term of 5 years and an interest only slightly higher than the rate associated with the debt consolidation loan. In this case, if the term of the debt integration loan, is 30 years the refund of the original loan would be stretched out over the course of 30 years at an rate of interest which is only slightly lower than the original rate. In this case it’s clear the householder might end up paying more in the long run. However, the every month payments will probably be drastically reduced. This type of decision forces the householder to decide whether an overall savings or lower monthly payments is more important.

Does Re-Financing Improve Your Financial Situation?

Householders who are considering re-financing for the purpose of debt consolidation should carefully consider whether or not their financial situation will be improved by re-financing. This is important as a few householders may choose to re-finance as it increases their every month cash flow even if it doesn’t effect in an overall cost savings. There are many mortgage calculators available on the Internet which may be used for purposes such as determining whether or not monthly cash flow will increase. Using these calculators and consulting with industry experts will aid the householder to make a well informed decision.